Keppel DC REIT - OCBC Investment 2019-07-18: Demand Still Buoyant; Awaiting Acquisitions 


Keppel DC REIT - Demand Still Buoyant; Awaiting Acquisitions 

  • Keppel DC REIT's 2Q19 DPU +6.0% y-o-y.
  • Positive rental reversions.
  • Bump up Fair Value to S$1.93.

2Q19 results within our expectations

  • KEPPEL DC REIT (SGX:AJBU) reported its 2Q19 results which met our expectations. Gross revenue and NPI jumped 13.2% and 13.6% y-o-y to S$47.5m and S$43.3m, respectively. This was driven by the acquisition of Keppel DC Singapore 5 in Jun 2018 (including rental top up). DPU grew 6.0% y-o-y to 1.93 S cents.
  • For 1H19, Keppel DC REIT’s gross revenue increased 19.5% y-o-y to S$95.5m, while NPI accelerated 19.9% y-o-y to S$86.5m. DPU of 3.85 S cents represented growth of 6.4% y-o-y and this formed 49.0% of our full-year forecast.

Positive rental reversions, albeit for smaller clients

  • Management shared that it completed five lease renewals during 2Q19, resulting in positive rental reversions, although the magnitude was not disclosed. The impact was also not significant given that these were smaller clients, but we believe this is a reflection of robust demand in the market. This is especially true for Singapore, with positive demand and supply dynamics.
  • Globally, the co-location market is expected to grow by 16%-18% this year, versus an earlier forecast of 15%-17%, according to BroadGroup.
  • Looking ahead, Keppel DC REIT remains focused on hunting for acquisitions, although there were some deals which were delayed or taken off the market. Given the increased competition for data centre assets and compression in cap rates, management highlighted that it would be more difficult to acquire at above the 7% cap rate level which it had traditionally been able to do in the past.

Raising our Fair Value on lower discount rate assumptions

  • We lower our risk-free rate assumption from 2.3% to 2.0% as we expect the interest rate environment to remain conducive over the foreseeable future. We also pare our overall cost of equity assumption from 7.4% to 6.7%. We believe this is justifiable given the following reasons:
    1. While Keppel DC REIT does not have a long listing history (IPO in Dec 2014), we believe it has increasingly been establishing a good track record in DPU growth and acquisitions,
    2. prudent capital management with a healthy aggregate leverage of 31.9% and consistent risk management strategy in place for its forex and debt hedges,
    3. defensive and unique asset class with ‘sticky’ client relationships and long portfolio WALE of 7.8 years, which is one of the longest in the S-REITs sector.
  • Factoring these in, our fair value estimate is bumped up from S$1.64 to S$1.93.

OCBC Research Team OCBC Investment Research | 2019-07-18
SGX Stock Analyst Report BUY MAINTAIN BUY 1.93 UP 1.640